A multi-member LLC operating agreement is a legal document that binds the members of a company and outlines essential information about the organization in writing. It is intended to provide a clear understanding of how the LLC will run and includes terms related to ownership percentage, management, and operations.
What Is a Multi-Member LLC?
A multi-member limited liability company, also known as MMLLC, is a type of business entity that has more than one owner. It combines a partnership’s flexibility with a corporation’s limited liability protection. This means that the owners’ personal assets are protected in case of any legal issues or lawsuits.
In a multi-member LLC, there are two main management styles: member-managed and manager-managed.
- Member-managed: All owners have a say in decision-making and management.
- Manager-managed: Owners appoint one or more managers to handle day-to-day operations.
The chosen management style is typically outlined in the LLC’s operating agreement.
Multi-Member LLC vs. Partnership
A partnership and a multi-member LLC can continue even if a member or partner leaves. However, having an operating agreement in place can provide guidelines on how the business should be handled if a member or partner leaves.
It is important to note that neither being a multi-member LLC nor having a partnership agreement ensures business continuity or makes the structure more stable. Partnership agreements are not required by any state, while operating agreements are required only by some states.
- A distinct legal entity separate from its members.
- Members have limited liability, generally not personally responsible for business debts and liabilities.
- Can be member-managed or manager-managed.
- Default is pass-through taxation, but can elect to be taxed as a C or S corporation.
- Ownership is typically represented by membership interests.
- Can have a perpetual existence, independent of changes in membership.
- Not a separate legal entity from its owners.
- Partners typically have personal liability for business debts and obligations.
- Managed by the partners.
- Pass-through taxation without the option to elect corporate tax status.
- Ownership can be determined through a partnership agreement or by the partner’s interest in the business if no agreement exists.
- May dissolve upon death, withdrawal, or bankruptcy of a partner (unless otherwise agreed.
What Should a Multi-Member Operating Agreement Include?
Your operating agreement should include vital information about how the LLC will run. It should generally cover:
- Ownership distribution: Based on contributions like property, money, and time.
- Member exit strategy: Procedures if a member dies or decides to leave.
- Principal business location: The company’s main operating address.
- Contract authority: Designation of specific individuals authorized to contract.
- Meeting schedules: Frequency and timing of member meetings for company affairs.
- Profit and loss distribution: Method for allocating profits and losses among members.
- Company formation: Details regarding the establishment of the company.
- Capital contributions: Information on initial and additional member investments.
- Member/officer compensation: Policies for compensating members or officers.
- Management team duties: Roles and responsibilities of the management team.
- Accounting practices: Guidelines for bookkeeping and financial record-keeping.
- Transfer/buyout protocols: Procedures for transferring interests or member buyouts.
How to Change a Single Member LLC to Multi-Member?
Converting a single-member LLC to a multi-member LLC requires adding at least one more member. After that, all members should create and sign a new operating agreement to specify the LLC’s ownership, management, and operations. You should also update your business registration with the relevant state agency and get any required licenses or permits.
Tax Consequences of Adding a Member to an LLC
Here are the consequences of adding a new member to an LLC in the form of a list:
- If the LLC was previously taxed as a disregarded entity, adding a new member will cause it to be taxed as a partnership. This means that the LLC will need to file a short-year return and Form 8832 with the IRS if it has already elected partnership taxation and has an EIN.
- If the LLC was formed within the last 75 days, it may be possible to retroactively elect C or S corp tax status to avoid filing short-year returns.
- The new member will be responsible for paying taxes on their share of the LLC’s net profits, regardless of whether they receive distributions or not.
- If the LLC is taxed as an S corporation, the new member’s share of the company’s net profit or loss will be reported on their personal tax return.
- The new member will be subject to payroll withholding tax on any salary they receive.
Below, you can download a multi-member LLC operating agreement template in PDF or Word format:
Frequently Asked Questions
Can a Multi-Member LLC Be a Disregarded Entity?
A business entity with multiple owners cannot be classified as a disregarded entity. According to federal income tax laws, a business entity with at least two owners is automatically considered a partnership.
However, the business entity can file Form 8832 (Entity Classification Election) and opt to be taxed as a corporation if desired.
Can a Multi-Member LLC Owner Be On Payroll?
Yes, a multi-member company owner can be on payroll. However, it is essential to understand that the owner must first be an official employee of the company and receive reasonable compensation for the services rendered.
The company must also withhold taxes from the owner’s paycheck and pay employer taxes on their behalf. It is highly recommended to seek advice from a tax professional regarding proper payroll and tax obligations for multi-member companies.
Can a Multi-Member LLC Be An S-Corp?
For a business to be eligible for S corporation taxation under federal tax regulations, it must meet specific requirements. These include being a domestic corporation or LLC, having no more than 100 shareholders or members, not having any corporate, partnership, or non-resident alien shareholders, and having only one class of stock.
Additionally, ineligible corporations such as financial institutions, insurance companies, and domestic international sales corporations cannot qualify for S corporation taxation.